Inflation down in October, bolsters hopes of a rate cut by RBI

November 16, 2016 — INDOLINK Consulting (es)

Source: Business Standard, Nov 16, 2016

New Delhi: Inflation fell in November on both the consumer price index (CPI) and the wholesale price index (WPI), giving room to the Reserve Bank of India (RBI)-chaired panel to cut the policy rate further to improve the growth rate.

While CPI inflation was down to 4.2% in October, the lowest in the new series launched since November 2014, against 4.31% in the September, the WPI rate of price rise declined to a four-month low of 3.39% compared to 3.57%, official data released on Tuesday showed.The inflation on both the indices decreased as the rate of price in food items declined. It fell to 3.32% in October from 3.88% in the previous month in terms of It is widely expected that the monetary policy committee would cut the policy rate as shrinkage of cash following demonetisation of old Rs 500 and Rs 1,000 notes is likely to further bring down inflation. It is also expected to deal a blow to economic activities. For this as well, a cut in the interest rates might become relevant.

India’s economic growth has already slowed down to a five-quarter low of 7.1% in the first quarter of the current financial year. The data for GDP growth during the second quarter of 2016-17 is slated to be released this month-end. The third quarter GDP might face the effect of the withdrawal of old Rs 500 and Rs 1,000 currency notes.

Within CPI, inflation in pulses came down drastically in CPI to 4.11% from 14.33%. However, it was still elevated in WPI despite a fall – 21.58% in October from 23.99% in the previous month.

Vegetable prices (not inflation) continued to fall on both indices, though by lower rates than in September. These fell by 5.71% from 7.21% in CPI and to 9.97% from 10.91% in WPI.

Going forward, food inflation is expected to cool down further due to expected normal monsoon rains. Although at 97% of the long period average, monsoon was way lower than the weather office prediction of 106%. The rains were normal this season after back-to-back drought for two straight years.The newly appointed monetary policy committee cut the policy rate by 0.25 percentage points earlier this month. RBI governor Urjit Patel had clarified that the inflation target was 4% (plus/minus 2%) over five years and not by early 2018.

The monetary policy committee’s stance was justified when industrial production in volume terms inched up by 0.7% in September after two straight months of contraction and that too when production increased in the pre-festival month.

In WPI, inflation in fuel and manufactured items, comprising almost 80% in the index, was slightly up in October compared to the previous month. Inflation in fuel was up at 6.18% in October from 5.58% in the previous month due to a price rise in both petrol and diesel. However, fuel price inflation came down to 2.8% in October from 3.07% in September.

Manufactured products, comprising almost 65% of the index, saw inflation ticking up to 2.67% from 2.48%. However, here as well, food items saw inflation falling to 10.48% from 11.21%.